The Coca-Cola Classic Investment Story
After an increase in its market value of over 850% (from less than $7 billion to more than $56 billion) in a decade The Coca-Cola Company was trading at over 27 times trailing earnings at the time we issued our Strong Buy recommendation on September 21, 1993. During the preceding year Coca-Cola stock had underperformed the broad market indexes and its peer groups. Industry analysts were concerned that Coca-Cola’s earnings’ growth would slow making its $57 billion market capitalization was excessive. The prevailing opinion among securities professionals during this period was that Coca-Cola would continue to be an underperformer. In the Barron’s 1994 annual Roundtable the participants agreed that the "Coke" story was too widely known and its stock was overvalued. In fact, one of its participants predicted it would be "the next Phillip Morris," a reference to the Phillip Morris pricing problems that caused the company’s stock to fall over 40% during 1993.
This was the background for our selection of The Coca-Cola Company as Asensio & Company, Inc.’s first major research project. We realized that adding value to the existing analysis of a very well covered $56 billion company was an ambitious task. Industry specialists from all the major securities firms followed Coke’s stock. In addition, Coke had one of the world’s most sophisticated investor and analyst internal support systems of any world wide traded company. Yet over the years our original, highly detailed six page text and four-chart analysis of Coke’s fundamentals and economics has been proven correct. The fact that Coke’s stock rose is not what makes the work correct. The fact that our analysis of the balance between risk and opportunity played out as predicted is what we believe valuable.
Our Coca-Cola analysis proves one of the important premises of Asensio’s research theory. We believe that value can be added in any situation by simply working harder and truer than the competition. The Coca-Cola investment story was widely known, and appeared overbought. Coke’s book value multiple expansion from 4.2 to 14.2 in ten years strongly supported this thesis. Our report’s analysis of Coke’s book value multiple showed it to be an indication of strength and stability, and not weakness and risk. We hope you enjoy reading this interesting, old but not dated, report.
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